Free tool · runs in your browser
Cap Rate Calculator
Enter your property's rent, vacancy, expenses, and price to calculate cap rate — the unlevered yield lenders and appraisers use to value income property.
Inputs
Results
How cap rate is calculated
- Effective gross income (EGI) = annual gross rent × (1 − vacancy rate). This is income actually collected after accounting for vacancies.
- Net operating income (NOI) = EGI − annual operating expenses. Operating expenses include property tax, insurance, management, maintenance, and reserves — but never the mortgage payment.
- Cap rate = NOI ÷ property value (or purchase price). A $300,000 property generating $18,000 NOI has a 6% cap rate.
- Gross rent multiplier (GRM) = property value ÷ annual gross rent. A quick screen used before full underwriting — lower GRM indicates relatively cheaper pricing, but it ignores expenses and vacancy.
What is a good cap rate?
Cap rates vary widely by market, property type, and risk. There is no single "good" cap rate — the right benchmark is the prevailing cap rate for comparable properties in the same market.
| Market type | Typical cap rate range | What it implies |
|---|---|---|
| High-demand coastal metros (NYC, SF, LA) | 3–5% | Expensive relative to income; investors accept low yields for appreciation and liquidity |
| Mid-tier metros (Denver, Austin, Nashville) | 5–7% | Moderate pricing; balanced income return and growth potential |
| Secondary and tertiary markets (Midwest, South) | 7–10% | Lower prices relative to income; higher yield but less liquidity and slower appreciation |
| Value-add / distressed | 10%+ | High current yield, but income or occupancy may be unstable; significant management risk |
Ranges reflect 2025–2026 market conditions for stabilized single-family and small multifamily (1–4 units). Commercial property cap rates can differ substantially.
Cap rate vs. cash-on-cash return — key difference
Cap rate is unlevered: it measures the property's return as if you paid all cash with no mortgage. This makes it useful for comparing deals across different financing structures and for estimating market value.
Cash-on-cash return is levered: it divides annual pre-tax cash flow (after the mortgage payment) by the cash you actually invested. If you finance 75% of a purchase with a 7% mortgage, your cash-on-cash return will differ significantly from the cap rate — and the spread between them is your leverage effect.
Use cap rate to value the asset and compare across markets. Use cash-on-cash to evaluate your specific deal given your financing. Both matter; neither alone tells the full story. Use the full deal analyzer to see cash-on-cash, DSCR, and all returns together.
Implied value: solving for price from cap rate
If you know the NOI and the market cap rate, you can work backward to the implied market value: value = NOI ÷ cap rate. This is how commercial appraisers estimate property value and how buyers set offer prices.
The calculator shows implied values at cap rates from 4% to 10% so you can see how sensitive the estimated value is to the assumed cap rate. A property with $18,000 NOI:
- At 4% cap rate: implied value = $450,000
- At 6% cap rate: implied value = $300,000
- At 8% cap rate: implied value = $225,000
This range shows why buyers and sellers often disagree on price: they assume different cap rates for the same property. If local comparable sales imply a 6.5% cap rate and a seller is pricing at 5%, the buyer is being asked to pay a $68,000+ premium relative to the market.
Frequently asked questions
What does cap rate mean in real estate?
Cap rate (capitalization rate) is the return a property generates from its income, independent of how it is financed. A 6% cap rate means that for every $100,000 of value, the property produces $6,000 of net operating income per year. It is calculated as NOI ÷ property value and is the standard metric appraisers and commercial lenders use to value income property.
Does cap rate include the mortgage?
No. Cap rate is calculated on NOI, which excludes the mortgage payment. This is intentional: cap rate measures the property's unlevered yield so it can be compared across deals with different financing. The mortgage affects your cash-on-cash return and overall return on equity, but not the cap rate. Use the deal analyzer to calculate both.
What operating expenses should I include?
Include property tax, homeowner's insurance, property management fees (typically 8–12% of gross rent), maintenance and repair costs, capital expenditure reserves (often 5–10% of gross rent), HOA dues, and other recurring costs. Do not include the mortgage principal or interest, depreciation, or income taxes. A common mistake is underestimating maintenance and reserves, which overstates NOI and makes the cap rate look better than it is.
Is a higher or lower cap rate better?
It depends on your goal. A higher cap rate means more income relative to price — better yield, but usually in a higher-risk or slower-appreciation market. A lower cap rate means you are paying more for each dollar of income — lower yield, but often in a more liquid, appreciating market. Neither is universally better. Compare to prevailing market cap rates for similar properties in the same area to determine whether a deal is priced fairly.
How is cap rate related to property value?
Cap rate and value move in opposite directions: a higher cap rate implies a lower value for the same income, and vice versa. When interest rates rise, cap rates typically expand (rise), which causes property values to fall for the same NOI. When rates fall, cap rates compress, pushing values up. This inverse relationship is why rising rates put downward pressure on real estate prices even when rents hold steady.
Formulas last reviewed . Results are estimates for educational use; not financial advice. Methodology →